problems in the previous tax that had discouraged investment for several years. The 2013 change immediately sparked investment drilling and new discoveries such as the Pikka and Willow fields now under construction. Alaska’s oil and gas production tax is a net-profits type tax where expenses are allowed to be deducted before taxes are paid. There are also several incentives built into the tax intended to encourage new production. One of the problems with the previous pre-2013 tax was that its incentives were skewed toward encouraging capital investment with tax credits applied toward spending, the theory being that this would lead to more production. However, concerns were also being raised that the credits linked to investment led to less discipline in planning for capital outlays and a tendency toward “gold plating” of projects. A key change in SB 21 was to link credits to production, not spending. This was the concept behind the per-barrel production credits. Another key change in the 2013 tax change, however, was to increase the net profits tax rate from 25% to 35%, which is the tax rate today. The per-barrel production tax credit was intended to offset this increase in the tax rate by rewarding producers who increase production. With all of these changes the Alaska production tax is argued to still be one of the most complicated taxes on industry in the nation. There are also other state taxes applied to oil and gas producers, of course, including the state corporate income tax, which is structured differently, and to the state’s advantage, from the state corporate income tax applied to income from other Alaska businesses. There is also a state oil and gas property tax on facilities like production plants and pipelines and that is the only state property tax. Producers also pay a royalty to the state on production from state-owned land, which is not a tax but rather the landowner’s share of production or its value. The property tax and royalty are simpler in structure and easier for the state to administer, and for taxpayers to pay, than the production tax. The property tax is a flat 20-mill or two percent tax on the appraised value of the property. There are complications, of course, particularly when depreciation of assets is allowed, but in principle the tax works like a conventional municipal or state property tax. The royalty is similarly simple in concept. It is either one-eighth or one-sixth of the actual production depending on the lease or, if the tax is paid in value, or cash, 12.5% or 16.6% of the value of production as calculated at the “wellhead,” or point of production. Value is calculated by subtracting tanker and pipeline costs from the nearest market where oil is sold, which for most Alaska production is the U.S. Pacific Northwest, to determine a value at the North Slope. www.AKRDC.org 15 VVOOLLUUMMEE1 2| I|SI S US UE E2 2| S| US PMRMI NE GR 2 0 2 54 The per-barrel credit is a key part of the production tax changes made by the Legislature in 2013 that corrected major problems in the previous tax that had discouraged investment for several years. The 2013 change immediately sparked investment drilling and new discoveries such as the Pikka and Willow fields now under construction.
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